Let chips fall where they may

China’s political system allows quick switches in economic strategies

Shahid Javed Burki December 17, 2018
The writer is a former caretaker finance minister and served as vice-president of the World Bank

Electronic chips are the ‘fuel’ that drives the global economy. The process for making them becomes more complex by the day. There are three parts to it. It starts with the mining of raw silicon in Appalachian Mountains in America’s West Virginia state where deposits of silicon dioxide are of the highest quality. The sand then is shipped most likely to Japan to be refined and sliced into thin wafers. The wafers then go to a chip factory, or ‘fab’ perhaps in Taiwan or South Korea. There they are printed with a pattern using photolithography equipment made in the Netherlands. The pattern may be made in ARM, a company based in Britain.

The sophistication of the chip-making industry has meant considerable consolidation. It takes about $15 billion to build a new fab. In 2001, there were 29 companies offering the most advanced fab facilities. Now there are only five; among them is the Chinese HiSilicon owned by Huawei and Tsingua University. The firm is state-owned. China was until recently at the lower end of the production process but it is now catching up. In 2014, Beijing established a $150 billion fund to develop its chip-making industry. Chips figure prominently in ‘Made in China 2025’, a national development plan that would make China rely on advanced technologies to fuel the country’s further development.

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A new world is emerging with the rise of China. The country saw its gross national product increase 32-fold in the quarter century between 1980 and 2007. The process began with the opening up of the country under Supreme Leader Deng Xiaoping. Double-digit rates of the GDP growth became possible as China developed low-wage manufacturing for exports to rich countries. The United States was the most important market. However, rapid economic progress resulted in increasing domestic wages making China less competitive in this kind of business.

China’s political system allows quick switches in economic strategies. Under President Xi Jinping, China’s new economic strategy has three components. It is investing heavily in new technologies such as Artificial Intelligence (AI) and machine learning (ML). It is populating its western provinces that have low population density, easing the pressure on the densely-populated east coast. And it is investing in land-based commerce to connect the country — in particular its western provinces — with Asia, Eastern Europe and Africa. The last initiative has taken the form of the Belt and Road Initiative of which the China-Pakistan Economic Corridor is by far the most important component.

With the economy thus reoriented, China will continue a reasonably high rate of economic growth, overtaking the United States within a decade and become the world’s largest economy. As Thucydides, the Greek sage, put it centuries ago with reference to the conflict between the states of Sparta and Athens, conflict is inevitable when a rising power displaces an established power. In the case of the Greek states the conflict took the form of a war in which Athens won and became the dominant power in the area. The developing United States-China conflict may not result in open war but could still produce a serious confrontation.

The first few shots have been fired by the United States in the form of tariffs on imports from China. With China now investing heavily in new technologies, there is a growing fear in the United States that it may lose the leading position it has occupied up until now. It is interesting that the time at which Presidents Donald Trump and Xi Jinping were discussing how to resolve the growing trade dispute, the United States was moving against Meng Wanzhou, the chief financial officer of the Chinese telecom company Huawei. She was picked up in Vancouver as she was changing planes. A Silicon Valley executive summed up the situation created by her arrest. “It’s worrisome, because it’s an escalation we did not need,” referring to the already tense trade talks between the two countries. “What China will do is anyone’s guess.” He was voicing the fear that the Chinese may retaliate by apprehending American technology leaders while they were visiting China.

According to Kara Swisher, editor at large for the technology news website Recode, while everyone focuses on the drama surrounding the arrest of Ms Meng, “to my mind there is a much more important fight brewing. Specifically who will control the next internet age, and by whose rules will it be run? Until recently, the answer was clearly the United States, from which the internet sprang, wiring the world together and, in the process, resulting in the generation of the greatest of power and wealth in history.” But now the rate of growth in the Chinese investment in chip-making and advanced technologies was twice as high as that in the United States.

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The Meng arrest was an indication of the complexity of the world in which we now live. The immediate explanation was that Huawei, the company Meng’s father founded, had violated the United States sanctions on Iran by doing business in that country. The Iranian sanctions had resulted after President Trump walked out of the nuclear deal Barack Obama, Trump’s predecessor, had signed with Tehran along with other major world powers. This was done in spite of the fact that Iran had complied fully with the provisions of the deal. This unilateral move on Trump’s part was against international practice and was taken as a result of the pressure exerted by Israel. There were other intriguing aspects to the Meng story. One was that her father, the Huawei founder, once worked in the Chinese military. This has set off alarm bells in the United States about Huawei’s ties with the government.

What is the meaning of all this for Pakistan where China has arrived with a large investment programme that is currently focused on improving the country’s infrastructure and connectivity with the world outside. Prime Minister Imran Khan has announced his intention to reorient the programme to make it more meaningful for the country’s youth. The IT sector should be incorporated in the reformulated programme to help the youth acquire the skills needed by modern services.

Published in The Express Tribune, December 17th, 2018.

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